De Facto Socialism, 20 Million Vacant Houses and Squattertown, USA

June 30, 2009


Combine rising foreclosures and unemployment with de facto Federal ownership of millions of homes and you eventually get de facto socialized housing.


Correspondent Richard Metzger and I have been discussing the consequences of rising foreclosures/unemployment and the de facto government ownership of millions of U.S. houses via Fannie Mae/Freddie Mac and direct ownership/control of banks.

There are a lot of threads to pull together on this topic, so please bear with me as we set up the contexts.

The party line on the housing bust is that "the market" will solve everything.Millions of foreclosed homes and apartment buildings will be sold to millions of buyers, who will fix them up and rent them out for tidy profits.

One little problem with that rosy scenario: how can unemployed households pay rent? Like all the other "green shoots" scenarios, this one depends on semi-full employment to pan out. But rather than semi-full employment, we're facing a tidal wave of job losses which is far from being spent.

Back in January, I posted this analysis which concluded job losses won't stop at today's 6.7 million but proceed on to 21 million or even 30 million: The End of (Paying) Work .

Meanwhile, house prices continue their relentless decline. Home Prices Continued Their Decline in March (New York Times)

The S&P/Case-Shiller U.S. National Home Price Index – which covers all nine U.S. census divisions – recorded a 19.1% decline in the 1st quarter of 2009 versus the 1st quarter of 2008, the largest decline in the series’ 21-year history. The 10-City and 20-City Composites recorded annual declines of 18.6% and 18.7%, respectively. These are slight improvements from their returns reported for February. (from the report link in the NY Times story)

Overwhelmed, the banks are now taking a different approach: dumping the properties to clear their books, making them “extremely motivated sellers,” as Mr. Havig calls them.

Dumping properties has worked so far because the quantity dribbled onto the market by lenders has been modest and a pool of anxious-to-catch-the-bottom buyers had gathered. But once this shallow pool has been soaked up, then there is no long-term source of buyers.

Indeed, buyers bidding up prices now will regret their impatience in a year as prices continue their inexorable slide downward.

Richard also sent me this story on shrinking Rust Belt cities bulldozing suburbs:

US cities may have to be bulldozed in order to survive: Dozens of US cities may have entire neighbourhoods bulldozed as part of drastic "shrink to survive" proposals being considered by the Obama administration to tackle economic decline.

While this is a somewhat sensationalist headline, it does raise a number of complex issues.

1. If an old house has been stripped or left vacant for long periods of time in locales with extreme summers and winters, then it may well be not worth fixing up. Its only value will be for scrap lumber, etc.

2. If a house is still habitable, but outside the shrinking radius of city services, does that matter to someone unable to pay rent on a nicer, more central house? Perhaps not.

3. If such free housing (abandoned, foreclosed and unsold, etc.) outside the shrinking city jurisdiction is occupied by informal residents, i.e. squatters, then what authority (if any) is in place?

I have covered many troubling aspects of the housing bubble's inevitable deflation for years. Just for context, let's glance as the key points in the following stories:

Can 4% of Homeowners Sink the Entire Market? (February 21, 2007)

If 4% of all American homeowners fall into foreclosure, could that "small number" cause a collapse in the entire housing market? The Pareto principle says: yes.

How 4% of Mortgages Have Brought Down the Entire Market (August 21, 2007)

Back on February 21, 2007, I invoked The Pareto principle to suggest that a mere 4% of U.S. mortgages going bad could bring down the entire U.S. housing and mortgage markets. Seven months later, that call appears to be playing out in spades.

It now seems likely that the 64/4 (80/20) rule is playing out globally--the "limited" subprime meltdown is set to take down the global mortgage market and the trillions in derivatives which have been written on trillions in real estate-based debt.

Will Delinquencies Trigger a New American Revolution? (April 7, 2008)

Two years ago I predicted we'd soon see 5 million foreclosed/distressed homes, 5 million REO/investment/2nd homes languishing on the market and lender/thrift losses of $500 billion. I seem to have undershot the losses...

Interestingly, there are 20 million vacant dwellings in the U.S., of which only 7 million are vacation homes. So much for any perceived "shortage" of housing, of any type.

Feedback Loop of Recession: Housing Bust, Debt and Layoffs (March 10, 2008)

Could 50% of All Homes End Up in Foreclosure? (June 3, 2008)

Just how bad could the housing bust get? How about half of all urban homes being in foreclosure? As stunning or unbelievable as that may sound, it already happened once in the U.S., in the Great Depression, as documented in this report: Lessons from the Great Depression (St. Louis Federal Reserve).

The Great Fall: How Suburbs De-gentrify to Ghettos (November 20, 2007)

A disturbing number of mainstream media stories are documenting the appearance of inner-city plagues such as gangs, drugs and graffiti in what were recently middle-class suburbs.

The Company Store, Debt and Serfdom (October 24, 2008)

Most astonishingly, the Ministry of Propaganda has succeeded in diverting the nation's attention from the Company store/debt-serf realities to a bogus "debate" over "socialism" and "capitalism." As Michael Hudson has pointed out, the rentier class which owns the mortgages, loans and credit card debt is not capitalist at all; it is essentially medieval in structure. It takes no risks, creates no innovations, invests no capital in new enterprises or indeed, performs any classical capitalist functions at all.

It simply indebts the serfs, convinces them via doublespeak, propaganda and phony statistics that they are still gloriously "middle class" (that is, obscuring or reifying their true nature as mere miserable debt serfs) and then sits back and collects the interest and profits which the debt serfs will be struggling to pay until their last breath.

This is the real context: a growing army of millions of unemployed, declining housing values and equity, a banking sector bloated with foreclosed/distressed houses which cannot be sold en masse and a Ministry of Propaganda in full-court press on reality.

Unfortunately for Team Propaganda, Reality keeps sneaking through the full-court press and scoring easy dunks. (Shameless basketball analogy.)

Let's return to the key issue of no jobs=no income=no ability to pay rent or mortgage. The entire U.S. system of unemployment insurance is based on the premise that no recession can last longer than six months--thus unemployment runs out after 26 weeks. Now, as dark storm clouds gather, this is being extended to 39 weeks--nine months. But few observers are pondering what happens next year when that nine months' of income expires and millions more lose their jobs.

This raises a fundamental question which Richard poses thusly:

With the news of California's impending financial implosion, and the buzz about cutting off welfare, etc., in the state, I wonder where are they going to expect the tsunami of future homeless families to go? Under a bridge? Their front yards? The curb?

I believe that more than 60% in Los Angeles county are renters. Let's say for sake of argument that the non-bubble related, non-FIRE related industries can only really sustain 75% of CA workers and that there is 25% who are unable to find work. It's not that far off from that now. No one believes the official statistics. When the state resources really get run down, will they still evict unemployed people unable to pay their rent or will there be something like "rent vouchers" like they had in the U.K. pre-Thatcher?

We have no history of widespread government housing here unlike many European countries. How will concepts of private property --and laws-- have to change to deal with something like "rent vouchers" being injected into the picture? It's difficult for me to imagine any other practical method of keeping unemployed renters in their homes, but what of the landlord's obligations to the banks with their mortgages? Does the voucher convert into money at some stage of the game?

This seems to be a pretty toxic string to pull on the already threadbare sweater of the banking system. But for the life of me I cannot think of another way they can handle this situation without riots in the streets.

And suppose if nothing is done and they are allowing evictions and the sheriff's deputies still carry them out... picture up to 10% of renters and their landlords clogging up the courts system. Imagine the news stories about landlords hiring goons to crack the heads of tenants they want out, etc.

When the landlords start walking away, too, that's going to get interesting. It may be that "widespread government housing" in the US of A takes the form of abandoned properties being taken over by the nationalized banking system...

It seems inevitable to me that as jobs vanish and incomes drop, rents will decline and vacancies will rise. This will trigger a wave of foreclosures of landlords who bought rental properties based on full occupancy and high (full employment) rents.

As noted here before, that raise all sorts of other "interesting" issues; readers have recalled living in foreclosed apartment buildings during the late 1980s savings & loan bust and not knowing who even owned the building. There was thus no one to ray rent to.

One key feature of the present is completely unprecedented in American history: the Federal government essentially owns millions of dwellings via its takeover of the GSEs Fannie Mae and Freddie Mac. These two lenders were once quasi-governmentally owned; now the quasi has been dropped. Fannie and Freddie own $5 trillion in mortgages; so when the owner walks away or defaults, guess who ends up owning the house?

You and me: the taxpayers.

Add in trillions of dollars of FHA and VA loans which arein default/distressed--also government guaranteed and thus in a sense government-owned--and direct Federal ownership of shares in major banks (which absorbed mortgage lenders like Countrywide, WAMU and Wachovia in Federally overseen shotgun marriages) and you end up with Federal ownership of a significant portion of the entire U.S. mortgage/housing stock. (Fannie and Freddie alone account for half of all outstanding mortgages.)

Back to Richard's question: so exactly what will the U.S. do with 10 or even 20 million unemployed/low-income households? As noted above, there are already 20 million vacant dwellings. Even bulldozing 2 million of them won't change the big picture, and it certainly won't address the core issue of housing and feeding 10 million households with essentially zero prospects for formal employment in an economy burdened by staggering debt, losses and interest payments and a FIRE (finance, real estate and insurance) economy which has imploded and wil never come back.

The Ministry of Propaganda has an ironic task before it: it must continue its relentless cheerleading and its relentless attacks on "socialism" (whatever that means) even as the Federal government must somehow prepare to deal with 10 or 20 million homeless, broke households on a long-term basis.

Even more ironically, that same Federal government now owns, via Federally backed mortgages, some 20 million dwellings. Now put all this together. Either we face up to 20 million households living in Squattertown, U.S.A. or the Federal government faces up to the obligations it now carries as reluctant owner of 20 million foreclosed/distressed/defaulted dwellings.

Is providing low-cost housing for 20 million homeless people "socialist"? If so, bring it on, Ministry of Propaganda be damned.


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Globalization and China: Neoliberal Capitalism's Last "Fix"

June 29, 2009


Rather than being the new leader of the global economy, China is the bag-holder in global Capitalism's last 'fix": exploitation passed off as globalization.


What's going to pull the global economy out of deep recession? The current story requires only one word: China. China's massive domestic stimulus is going to spark a sustained domestic demand for Chinese-made goods, lessening China's dependency on exports. Further good news: China's domestic growth will spur demand for commodities and grains, driving prices much higher.

Before we accept this account, perhaps we should step back and look at the larger context of globalization, in which China is only one part. From at least one perspective, the opening of China was simply part of neoliberal Capitalism's last "fix" of a structurally failing system.

From this point of view, China's productive output (largely foreign-owned and controlled, mind you) enabled vast profits to be reaped by global capital even as it opened new markets for advanced economies like Japan and Germany which had literally run out of new markets to exploit for machinery, toolmaking equipment, etc.

More cynically, China offered a low-cost was to evade the West's stringent environmental regulations.

From this point of view, China is not the world-beating leader of the global economy: it is the bag-holder: the last big market ruthlessly exploited and the one which will now be left behind as global capital exists, leaving China to deal with the social rubble and dire ecological consequences of rapid, unconstrained industrialization.

This is a contrarian view--did you expect anything else?--but read on for a longer-term perspective on "the China Miracle." (I know this is heavy lifting, but stick with me for at least a few more paragraphs--CHS.)

One more point to consider before we begin: the history of global trade stretches back thousands of years because it was mutually profitable to both ends of the trade. Globalization proports to be a continuation of such mutually beneficial exchange, but this is only a simulacrum: the reality is that much of globalization is not mutually beneficial exchange of goods but exploitation on the industrial grab-and-run or Plantation models.

In essence, globalization was neoliberal Capitalism's attempt to save itself from the endgame of advanced capitalism foreseen by Marx: overcapacity which leads to a collapse in profits and thus a decline in capital and the overall economy.

Marx's insight was straightforward: the dynamic of capitalism is for production to rise to meet demand--and then keep rising. As demand is sated, capacity continues to grow because Capital is like a shark--it must move forward or it dies, and it moves toward what was immensely profitable in the recent past.

This is how we get overbuilding of office and retail space: as demand (and profits) soar, then everyone with capital rushes in to enjoy the profit spree. But ironically, this massive rush to the most profitable return guarantees overbuilding and overcapacity.

As Marx noted, supply soon overshoots demand and sales plummet, wiping out profits. The end result is a move to monopoly capital, in which a handful of the strongest players squeeze out or buy out all the weaker players who fold as the retrun on capital goes negative (losses). The last players standing then consolidate and shutter most of the capacity, setting up a monopoply which then lowers supply below demand to maintain outsized profits.

All the workers laid off as capacity is shuttered no longer have income so they stop spending, which lowers demand even further. This cycle of boom and bust was inherent to Capitalism and Marx expected them to steadily become ever more extreme.

But capitalism "solved" this cycle of overcapacity and crashing demand/income/profits by turning to new overseas markets. Those with a military-backed Empire (for instance, Great Britain) could simply force new markets for domestic goods into existence overseas: by requiring consumers in India to buy cloth manufactured in England, for instance.

In other cases, advanced capitalist states opened new markets by forcing less developed economies to "offer" their low-cost manufactured goods, which quickly took market share from the more informally produced local goods.

The heyday of colonialism was driven by a simple "virtuous cycle" (virtuous for the advanced economy, not for the subjegated colony) in which the colony was forced to ship its raw materials to the colonial power at low cost while at the same time it was forced to pay a premium for the advanced economy's output/surplus goods.

Since the colonial power's domestic workforce benefitted immensely from this "global trade" (low commodity prices thanks to the exploited colonies and plentiful jobs to make the goods forced onto the colonies) then the Colonial Power's Elites received great political suport for the their one-sided "globalization" policies.

Apologists are quick to point out the supposedly stupendous benefits of this globalization for the "natives": high-quality advanced goods and paying work in an economy with little formal employment. Yet the reality is not so happy-happy: only economies with locally owned productive capacity such as Japan and Korea become wealthy economies. Those former colonies where foreign capital dominates the productive capacity and commodity extraction are in essence still exploited colonies.

Government ownership is also no panacea. When less-developed economies' primary assets (including commodities like oil) are owned and operated by the government, then the nation actually becomes poorer, not wealthier, due to the perverse dynamic of the State (government) and capital.

As profits roll in, the State, unlike private capital, defers investment in favor of political patronage and the spoils of "leadership." The incentives to politicians and the State's technocrat managers is thus to eat their seed corn whenever possible, where private capital understands that surplus capital must be invested or deployed in search of high returns lest it dwindle to zero as all profits are extracted and spent.

This mechanism is called the paradox of plenty in which resource-rich nations such as Venzuela and Argentina grow progressively more impoverished under State control of the nation's assets.

A corollary of this mechanism is the impoverishment of oil-exporting nations who find redistributing the wealth created by fossil fuels much easier than creating a productive labor force and infrastructure. Thus as the income from oil gyrates (and as oil inevitably enters the depletion phase) then the nation has no cultural or economic Plan B to generate national income and wealth.

With these mechanisms in mind, we can see that the advanced economies have attempted to save Capitalism by colonizing China for production and their own domestic populations for forced consumption.

Of the many misconceptions about China's spectacular economic growth, perhaps none is more misleading than the assumption that the capital and surplus profits being made in China will stay in China. Despite the much-touted public ownership of joint-venture companies, much of the profitable production in China is owned by non-PRC (People's Republic of China) companies based in Taiwan, Japan, Korea and the West.

From a more clear-eyed perspective, China has been colonized by advanced economies to lower the cost of production and to establish a dumping ground for environmentally unsound production which their domestic citizenry will no longer tolerate. As with all colonies, the profits are extracted and sent elsewhere while apologists are hired to tout the glories of employment for China's teeming millions.

Until, of course, Marx's overcapacity cycle kicks in. Now that China's stupendous production capacity exceeds the potential demand of the entire world, including its own mostly impoverished domestic populace, then capital is fleeing China in its usual pursuit of higher returns, leaving behind tens of millions of unemployed workers and a toxic landscape.

The Chinese State is now attempting to counter this cycle by spending its own capital on stimulus, but State spending is not a replacement for capital or organic demand. Even worse, the Chinese State saddled its own banks with hundreds of billions of dollars in uncollectible debt in a vain attempt to prop up thousands of State-owned enterprises which racked up gigantic losses even during the boom.

The Chinese State attempted to staunch this open wound by closing thousands of its factories but the uncollectible debts remain, buried by accounting tricks within the books of its four major banks and government finance ministries.

The bloom is off the rose now that the overcapacity in China is no longer profitable to global capital and in essence the Chinese State is left holding the bag: stupendous losses in its own financial system, horrendously costly environmental damage and an industrial infrastructure which is losing value as capital shifts elsewhere.

Meanwhile, advanced Capitalism expanded due to two key innovations: the colonization of its own domestic consumers and the exponential increase in speculative debt instruments.

The essence of colonization is the forcing opening of new markets for surplus production. Frustrated by the poverty of 80% of the Chinese and Indian populaces--people with almost no surplus income cannot consume much in the way of surplus production--global capitalism turned to its own domestic populaces.

By lowering the cost of money to near-zero and generating a gigantic asset bubble in the one asset every middle class consumer already owned--a house--then global capital in essence colonized its own domestic populaces by opening a heretofore limited market for surplus production: a consumerist blow-off of unprecedented scope fueled by limitless credit and a rising asset base (real estate) inflated by the same limitless credit, all extended by a State propelled by the need for the sort of domestic economic growth which maintains political support for the State's leadership elites.

Now that game has expired as the advanced-economy consumers finally reached the limits of their ability to service their rapidly expanding debts. Even the U.S. government's massive meddling and the printing/borrowing of trillions of dollars is not re-inflating the real estate bubble, and thus there is no collateral left to support the limitless credit global capital now requires for growth.

Advanced Capitalism is thus facing a crisis of unprecedented scale and scope: the globalization/colonization "escape" from overcapacity has come to a dead end. While some eternally hopeful capitalists look to the former colonies of Africa as the growth engine for global capitalism, a quick look at the capacity of China and Asia to produce goods quickly reveals that hope as baseless: if we add up the remaining production in the West and developed East Asia with China's monumental new capacity, we find that the global capacity outstrips all potential demand.

The world could easily ship 20 million new autos a year to Africa, but unfortunately for the advanced capitalist nations, there isn't enough income in Africa to support 100 million autos and the vast infrastructre they require. The same can be said of the billion impoverished residents of China and India. Global capital would be delighted to sell them all its surplus production but for the sad fact they have no money or collateral on which to base consumer borrowing.

Now that the global real estate bubble has burst, global capital is facing a real dilemma: it has colonized and exploited virtually every populace available, and there is no one left to exploit. Their lackeys in the governments have eliminated moral hazard (that is, go ahead and speculate wildly, we'll save you all regardless of risk or the size of your losses) and expanded credit exponentially, but never-ending exponential growth is simply not possible.

And so now with the destruction of the bogus real estate bubble and speculative "wealth," global capital has screeched to a halt at the edge of an abyss it has avoided for a hundred years: finally, there is no place left to sell overproduction, and the domestic populaces it depends on for political support are restive as they sense the ground beneath their "prosperity" has fallen away.

Thus global capital is desperately demanding the State print/borrow trillions of dollars in a futile effort to either inflate new bubbles and thus create new markets. The reinflation will fail, even as they push governments into insolvency and fail to save neoliberal capitalism.

Globalization also has a host of other pernicious features.

1. Concentration of resources and political power. Global capital, armed with virtually unlimited access to capital via the capital markets and various exotic instruments such as derivatives, can always outbid local owners/capitalists for resources. Once the forest, oil field, etc. is owned (or joint-ventured with local crony capitalists or Oligarch families) then it is promptly stripped/exploited/depleted.

2. No accountability for enviromental damage. Any environmental damage that results is of no consequence because the local political Elite can be bought for relatively modest sums. There is no profit in cleaning up the site and so to do so would be "irrational" in a rational-market metric.

Perhaps this distance from the environmental consequences of resource/wealth extraction is globalization's most pernicious feature. Mine owners never live near the tailings, and the coal plant's owners never live downwind of the sooty plume, either.

The more distant the owner, the less accountable they are for local consequences.

In today's Internet-savvy world, global capital places some modest value on corporate image, and thus some sort of simulacrum of environmental concern is made and then hyped via company propaganda. In a handful of cases, wise stewardships is not just a propaganda talking point; but the circumstances behind these exceptions are not easily codified.

3. Redistribution of income to capital from labor or local ownership is "necessary" to encourage "investment." Even in Empire States like the U.S., foreign capital is given numerous tax loopholes and other redirections of income to capital. This is always explained as necessary to encourage "investment."

But this greater income did not appear out of thin air; it was redistributed from labor and local owners via tax loopholes and credits. But since global capital is driven to seek the highest returns possible, the income exracted from Locale A is rarely reinvested in Locale A. This justification for the income redistribution--to encourage "investment"--is thus a cover for resource/profit extraction.

In the U.S., global companies like General Motors have received taxpayer bailouts in the tens of billions, supposedly to keep their production and workforce in the U.S., when the demand of global capital for higher returns forces the company to expand in Brazil at the expense of domestic U.S. jobs.

In one sense, the company has no choice. It must deploy its remaining capital at the highest return or simply close down. In the Chinese model the State owns the factories and continues to operate them at a loss. But as China's own state-owned enterprises show, permanent losses are simply not sustainable, even for the government.

4. As middle class jobs are cut, demand falls, exacerbating overcapacity.Global capital shifts away from high cost production (except where that opportunity is limited by the State), replacing middle class employment in advanced economies with lower-cost labor in less-developed economies.

Ironically, this lowers demand for the global companies' goods even as their overseas capacity expands. The net result is that financial speculation becomes an increasingly attractive use for capital. Thus selling consumers credit with which to buy cars becomes more profitable than selling them cars. Additional profit is reaped by bundling these consumer loans into packages--securitization--and selling the newly minted securities to credulous imvestors around the world.

Thus speculative leveraged credit and securitization can vastly increase profits even as production falls.

5. As its own income falls, the middle class follows the lead of global capital by increasingly relying on credit-based speculation rather than production for income. No one is more anxious to pursue speculative gains than someone whose income from labor is declining. Thus homeowners or prospective homeowners were delighted to follow global capital's forays into credit-based real estate speculation.

Unfortunately, speculation is no substitute in the long run for producing actual goods and services, and once the exponential blow-off was reached and the bubble popped, global capital simply sold off (or got bailed out) and moved on, while the middle class speculators were left with staggering losses in real wealth or capital traps (assets declining in value which could not be sold).

6. Due to its global nature, capital is no longer accountable for the consequences of its choices. Here's how it works: global capital gets huge tax credits (incentives that are basically nothing more than redistribtion of income from labor and local entreprenuers to global capital) for "investing" in the local economy. It them mines the local labor and/or resources of profits until overcapacity or depletion strikes. Then it shutters the factory or mine and move its machinery elsewhere, leaving the local economy a shambles. Next it hypes the need for "investment" elsewhere, moving production to wherever offers the highest tax benefits, the least environmental restrictions and the lowest labor costs. Final step: repeat.

From the point of view of global capital, this is "obviously" the only model which "works." Local residents, workers and small-scale enterprise owners will disagree once their locale has been stripmined of profits and wealth.

In sum: globalization is a key driver in the end of paying work and the impoverishment of local labor, resources and enterprise via the redistribution of profits and income to global capital.


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Saturday Quiz: Why Is the Headline Unemployment Rate Bogus?

As monthly unemployment numbers drop, it's important to recall that the headline unemployment rate is entirely bogus. Here's why.


As the stock market awaits next week's unemployment numbers with barely repressed excitement--for a lower weekly unemployment data point would boost the "green shoots" propaganda campaign greatly--it's a good time to answer this question: Why Is the Headline Unemployment Rate Bogus?

1. The "Continuing claims" headline number is inherently flawed. While the unemployment rate is calculated in a number of ways (the so-called household survey methodology, etc.), the "headline numbers" which the MSMedia highlights are "continuing claims" (that is, the number of outstanding unemployment insurance claims) and "new claims" (the number of newly laid-off workers who filed for unemployment insurance).

All these different methodologies offer multiple opportunities for statistical trickery and spin. Various pundits and academics argue the statistical estimates are "valid," but their arguments are akin to the ancient debates over "how many angels can dance on the head of a pin"?

Here is the relevant description from the horse's mouth, the BLS (Bureau of Labor Statistics):

Differences Between Data Series:

Figures on unemployment insurance claims, prepared by the Employment and Training Administration of the U.S. Department of Labor, exclude, in addition to otherwise eligible persons who do not file claims for benefits,persons who have exhausted their benefit rights, persons who have been disqualified from receiving benefits, new workers who have not earned rights to unemployment insurance, and persons losing jobs not covered by unemployment insurance systems (some workers in agriculture, domestic services, and religious organizations, and self employed and unpaid family workers).

In addition, the qualifications for receiving unemployment compensation differ from the definition of unemployment used in the household survey. For example, persons with a job but not at work and persons working only a few hours during the week are sometimes eligible for unemployment compensation, but are classified as employed rather than unemployed in the household survey.

Among all the gobbledigook we find the truth: once a worker's unemployment insurance benefits expire, that worker is dropped from the count. Yes, the unemployed worker may be counted in the household survey as "discouraged," but he or she might well end up being counted as "employed" because he or she was briefly called back for a few hours of work a week or took an 8-hour a week temp job.

Thus the reality is that long-term structural unemployment is completely masked by the bogus "headline unemployment" numbers. The basic distortion is simple: all these measures of unemployment assume data gathered in "normal times" can be extended into deep, prolonged recessions.

Consider this quote: Low unemployment rate hides rise in long-term jobless:

More than "80 percent of the people looking for a job will find a job in 26 weeks. That is what all the statistics show," said Commerce Secretary Carlos Gutierrez in a recent interview.

In other words, because in good times 80% of the unemployed find new jobs within 26 weeks, we drop everyone from the count after 26 weeks, even in a recession. Now that many states have extended unemployment benefits to 39 weeks, then workers remain in the system an additional 13 weeks. But after 39 weeks, then the long-term unemployed disappear from the count.

As a result, what the "green shoots" propaganda campaign will tout as plummeting unemployment will be in fact only the disappearance of those unemployed being counted in the "headline numbers."

2. The birth/death adjustment similarly extends "good times" trends into deep recession. The headline unemployment numbers get "adjusted" by the so-called birth/death model, which proports to calculate the births and deaths of businesses as a metric of job creation and loss.

Here is the explanation (re-read if you want to take a nap): Net Birth/Death Model (Bureau of Labor Statistics):

Earlier research indicated that while both the business birth and death portions of total employment are generally significant, the net contribution is relatively small and stable. To account for this net birth/death portion of total employment, BLS uses an estimation procedure with two components: the first component excludes employment losses from business deaths from sample-based estimation in order to offset the missing employment gains from business births. This is incorporated into the sample-based estimate procedure by simply not reflecting sample units going out of business, but imputing to them the same trend as the other firms in the sample. This step accounts for most of the net birth/death employment.

Uh, gotcha. The first line reveals the model's fatal flaw: take research conducted during an unprecedented 26-year period of prosperity, and then extend that "research" into a prolonged recession/depression. Is there any wonder this absurd model generates 200,000+ "new jobs" a month, including tens of thousands in industries which we all know are being gutted, like construction and finance?

The distortions and absurdities go unquestioned because the Status Quo is desperate to maintain the illusion that the U.S. economy is "fundamentally healthy" (false) and that a "green shoots" recovery is underway (also false).Frequent contributor U. Doran sent in this link to data which can't be spun or finessed: tax revenues. Yes, they're plummeting: Tax Revenues Tanking.

In 2007 and 2008, government tax revenues averaged about $633.15 billion per quarter.

For the first quarter of 2009, however, the numbers just in tell us that tax receipts totaled only about $442.39 billion — a decline of 30%.

Looking to confirm the trend, we compared the data for April – the big kahuna of tax collection months – to the 2007-2008 average, and found that individual income taxes this year were down more than 40%. The situation is even worse for corporate income taxes, which were down a stunning 67%!

When you add in all revenue from all sources (including Social Security revenue, government fees, etc.), the fiscal year-to-date – October through April – revenue shortfall comes to 19%, vs. the 14.6% projected in Obama’s budget. If, however, the accelerating shortfall apparent year-to-date, and in April in particular, continues, the spread between projected and actual tax receipts will widen considerably.

Tellingly, for the first time since 1983, the U.S. government posted a deficit in April. That’s a big swing in the wrong direction, as the bump in personal tax collections in April historically results in a big surplus — on average about $68 billion.

Thought the "green shoots" propaganda campaign will try most desperately to put a positive spin on the "headline unemployment numbers," tax receipts tell the real story: nobody's making money and nobody's hiring, they're still firing in a frantic effort to keep from going under.

Except Wal-Mart. So everything's ducky.

Thank you, Tom F. ($25), for your most generous contribution to this site. I am greatly honored by your support and readership.

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Domino Devolutions: Credit, Assets, Spending, Taxes, Jobs

The key to understanding the current Depression is the devolution of credit. As that devolved, it has toppled asset valuations, spending, tax revenues and jobs.


To understand the devolution of the global economy (macro) and our own communities (micro), we need to look up the chain of fallen dominoes to the first one: credit.

The debauchery of credit reached its perfection in the housing bubble. Credit, leverage and speculative fraud came to dominate the global economy: the global housing boom depended entirely on abundant credit at low interest rates, leveraged, securitized debt instruments (mortgage backed securities, CDOs, credit default swaps, etc.) and speculative fraud: housing-backed investment securities fraudulently rated and sold as "low-risk," property appraisals fraudulently jacked higher than market, mortgage applications backed with fraudulently stated income, and high-risk "toxic" exotic mortgages fraudulently presented and sold as "low-risk because the property value is rising."

As stated here many times: household income for all but the top 10% "high-caste" technocracy has been stagnant since the mid-1970s. Consumer spending, which made up 70% of the U.S. economy and a significant share of the global GDP, was totally dependent on the housing bubble in three ways:

1. Direct equity extraction via re-financing and HELOCs (home equity lines of credit)

2. The "wealth effect": for the 69% of households who owned a home, their home equity was their chief asset and the vast bulk of their wealth. As that rose, it fed the "animal spirits" so beloved by economists: as people feel wealthier, they spend more freely.

3. The housing bubble created vast new wealth for the middle class and the Elite alike due to the huge transactional churn of tens of millions of houses built and sold, then sold again and again, tens of millions of mortgages originated and then refinanced, tens of millions of new insurance policies written for ever larger amounts, tens of millions of new furniture sales, etc.

As for the Elite (the Plutocracy), the transactional churn was in immensely profitable derivatives and mortgage-backed securities, and a stock market rising on this bubbly "prosperity." The top hedge fund managers averaged $600 million a year in compesnation each while investment banks distributed tens of billions a year in bonuses.

Now the credit bubble has burst and credit is devolving everywhere. The stock market is encountering a spot of bother this morning as it's been discovered (gasp) that consumers are actually saving rather than spending every dollar (and then some) of their income. The signs of credit devolution are everywhere:

Credit card and HELOC limits are being dropped

Credit card issuance has plummeted

Credit card delinquency has risen to 10%

The market for mortgage-backed securities (MBS) has imploded to near-zero

The qualification standards for mortgages have risen

The devolution of global credit and the return of risk aversion means that the transactional churn which created so much of the wealth of the bubble has collapsed.

Even more devastating, the bubble-era asset valuations have also devolved, destroying most of the bubble's illusory rise in home equity. This means the homeowner has no collateral on which to base future borrowing/debt; thus no matter how cheap and abundant credit might be, there is no foundation for additional credit.

The "wealth effect" has devolved as well; people now feel (rightly) much poorer, and their response is to start saving after a decade of euphoric credit0based spending.

The government also debauched credit on a vast scale. The quasi-governmental (and now fully Federally backed) mortgage mills, Freddie Mac and Fannie Mae. churned out over $5 trillion in suspect mortgages. The Treasury borrowed additional trillions, largely from China, Japan and the Gulf oil exporters, to fund the expansion of empire (Good Cop, Bad Cop: Obama, Bush and Iraq June 24, 2009) and the distribution of "free money" to vast entitlement programs like Medicare which enriched a vast network of profitably parasitic enterprises.

Now the U.S. is borrowing $2 trillion a year just to maintain the status quo.The notion that every government on the planet can borrow vast sums each and every year, running stupendous deficits to prop up the status quo, and do so indefinitely, will soon be revealed as impossible. Credit cannot rise exponentially while assets, incomes and profits devolve.

At some point the demand for credit (deficit spending) will outstrip the supply of surplus capital and global interest rates will skyrocket. At that point the global game of "quantititive easing" and propping up the status quo with borrowed money will quickly devolve, as will the illusion that any government can repeal the business cycle and inflate additional asset bubbles at will to prop up consumer spending and tax revenues.

As income, profits and assets all devolve together, tax revenues devolve, too. Local and state governments have grown accustomed to ever higher employee counts, ever higher wages and ever richer benefits. The collapse of tax revenues is now causing state and local spending to contract and the services they provided to devolve.

So the devolution of credit led to the devolution of asset valuations/collateral, income, profits and thus tax revenues. All those dominoes are now toppling the one with the greatest impact on households: jobs.

Back in January I posted an analysis of the U.S. job market ( Endgame 3: The End of (Paying) Work; January 21, 2009) which concluded job losses will rise far beyond the current 6.7 million to 21 or even 30 million. Since this is the most critical devolution in process, I am reposting the key analysis.

Many commentators refer back to the Great Depression as a historical guide or template to our present situation. But our current predicaments are far deeper, as commentators such as James Howard Kunstler have shown. (The Long Emergency: Surviving the End of Oil, Climate Change, and Other Converging Catastrophes of the Twenty-First Century ) To mention a few of Kunstler's observations:

In 1929, the U.S. was the equivalent of Saudi Arabia today: the world's largest oil producer. Now we have to import fossil fuels on a gigantic scale.

In 1929, the U.S. had a fully functioning rail system for passenger transportation. This has shrunk to a shadow of its former capacity.

As extreme as debt loads were in 1929, our current level of indebtedness (as measured by GDP) is far higher for all sectors: government, business and households.

In 1929, millions of jobless citizens could return to the family farm or a family home in the countryside or small town. Now that the U.S. is heavily urbanized, this "Plan B" is no longer available for most unemployed.

In 1929, the U.S. was a major manufacturing/exporting power which actually ran trade surpluses for much of the previous 50 years.

In 1929, the government sector extracted a much smaller percentage of national income than it does today.

Hidden beneath these visible material, financial and demographic changes is a deeper one: the end of (paying) work.

The drivers behind this long-term decline in paying work cannot be reversed:

1. The U.S. is a high-cost economy with high structural overhead costs which cannot be reduced by any mechanism short of bankruptcy/insolvency or political revolution.

These costs include:

A. High taxes on business and households

B. Absurdly high "healthcare" (a.k.a. "sick-care") costs which are inexorably climbing at twice the rate of growth of the underlying economy

C. High real estate valuations based on cheap, "no-risk" money which have raised the costs of commercial rents and housing to levels which are far beyond historical correlations of real estate to income

D. The growth of government and its employees who have won pension benefits and wages which are roughly twice the cost of average private-sector wages and pension benefits.

2. The Internet and digital information technology are creatively destroying entire industries and entire job classifications which will not be coming back. Examples include the music and publishing industries and administrative overhead jobs such as file clerks and customer service representatives.

Even the IT sector itself (information technology) is vulnerable to the automation of software and coding. In industries such as tax preparation, 90% of their high-priced labor can be replaced by $30 software.

The consequences of the Internet's ubiquity are far-reaching. Not only can vast swaths of digital work be automated, much of the remainder can be performed overseas at lower labor rates than in the U.S. (Recall that up to half of a U.S. employee's compensation costs are healthcare and other overhead costs, so a wage-to-wage comparison will be misleading.)

As the Internet enables telecommuting and home-based digital work then the need for millions of square feet of office space falls, further pressuring the demand for high-cost commercial real estate.

Internet-enabled retail trade (Amazon.com, eBay.com, Zappos, etc.) is decimating high-rent brick-and-mortar retail outlets; as these close their doors then the demand for retail space falls precipitously, pressuring rents downward.

Just as craigslist has essentially wiped out print classified ads and Internet ticket sales have driven most travel agencies out of business, many other fields and industries will be reduced or eliminated by the efficiencies made possible by the Internet. Even fields like education may find the need for costly physical space may diminish as high-cost education migrates online.

Political control depends in large part on a quasi-monopolistic mass media amenable to the political goals of the State and Plutocracy. To the degree that the Web undermines that mass media's monopoly on "news" then it also undermines the political control of the State and its Plutocratic overlords.

The Internet/Web is thus the acme of creative destruction, for it is undermining all monopolies except that of capital and petroleum.

3. Globalization and a semi-open U.S. economy force global corporations and small businesses alike to make efficient cost-benefit analyses of where to deploy capital and shift production. Economies of scale, flexible production and lower tax/labor costs spell the difference between profitability and insolvency.

Hopelessly expensive industries like healthcare which have been protected to date will find global competition for scarce healthcare and pharmaceutical dollars rising.

4. As cheap, abundant energy disappears, the cost of materials, transport and production rise,leaving less for labor. As cheap, abundant energy disappears, tourism and the "leisure industry" is priced beyond the reach of consumers facing declining real wealth and income, slashing service jobs in leisure/tourism.

5. The debt-based consumer economy was not a permanent new level of consumption but a one-time anomaly based on an imprudently engineered reduction in the cost and availability of credit combined with a (false) perception of near-zero risk. The entire FIRE economy (finance, real estate and insurance) will be permanently reduced by digital automation and the shrinking of these sectors as the global debt and real estate bubbles burst.

If history is any guide, then interest rates will rise for a generation, effectively depressing real estate and other debt-dependent assets for a generation.

Though the Federal government is furiously borrowing and printing money, the ability to do so at no cost to the dollar (in terms of depreciating purchasing power) and at low interest rates is ending. Since Federal borrowing of trillions of dollars has effectively backstopped the U.S. GDP, the end of the government's "borrow and spend trillions" campaign will remove that backstop and cause spending and employment to further shrink.

Even worse, the rise in interest rates will divert billions from programs to servicing the Federal debt, further reducing government expenditures on goods and services. Since so much of the debt is held by non-U.S. entities, a significant share of this interest paid will end up overseas. This feedback loop will further reduce Federal spending and employment.

If reckless Federal borrowing and money-creation ends up destroying the purchasing power of the U.S. dollar, then that will add yet another feedback loop as consumers pay more for imported oil and other goods and have less to spend domestically, further suppressing employment.

As collateral (bubble-era real estate valuations) and credit fall, so will consumer debt and the spending it enabled.

6. The demographics of a large cohort (the global Baby Boom) entering retirement coupled with longer lives and costlier "healthcare" options guarantee all government entitlement programs will face insolvency and collapse or greatly reduced benefits within a decade.

One of the consequences of this will be the reduction of currently "healthy" healthcare employment; another will be the diversion of vast sums of income away from consumption and into retirement savings.

7. ESSA (eliminate, simplify, standardize and automate) has barely touched much of the U.S. economy. Union rules, old habits and lush revenues have protected millions of processes, procedures and jobs from the scrutiny of plummeting revenues and taxes. As credit dries up and collateral falls in value, spending falls which reduces employment and taxes, which further erodes jobs in a self-reinforcing feedback loop of ever lower spending and ever falling employment.

For instance, buying a car or property no longer requires the expertise implied by a 6% transaction fee. In effect, the research and transaction could be done digitally.

8. Mechanization and automation form a "scalability trap;" once production can be scaled up then the necessity for human labor permanently declines. If I understand the concept correctly, it refers to the inevitability of new scalable technologies replacing human labor.

In 2008, various analysts estimated the U.S. economy would shed about 2 millions jobs in 2009. Given that as of December 2008 there were over 137 million jobs, that doesn't sound all that horrific. Here are the employment statistics by category from the Bureau of Labor Statistics:

Nonfarm employment.......| 137,331
Goods-producing (1)........| 21,351
Construction ......... 7,141
Manufacturing ....... 13,423
Service-providing (1)......| 115,980
Retail trade (2)....... 15,259
Professional and
business services ..... 17,849
Education and health
services .......... 18,975
Leisure and
hospitality ....... 13,627
Government .......... 22,504

With job losses already exceeding 6.7 million as I write this in June, 2009, it seems the analysts were incredibly optimistic. (That is of course their job.)

Setting aside the absurdly low estimate of 2 million jobs lost, let's look at each category and make a rough back-of-the-envelope estimate for how much paying work each category might support in, say, 18 to 24 months.

Construction. While bridges being repaired will certainly support heavy-construction employment, the far larger categories of residential building and remodeling and commercial construction (office towers, malls, warehouses, etc.) are completely overbuilt for years to come. So let's guesstimate that there will be 50% less demand for construction and a job loss of 3.5 million in this category.

Manufacturing. Unfortunately, a tremendous amount of manufacturing is dependent on construction (glass, appliances, steel, etc.) and transportation (rubber, steel, components, semiconductors, etc.) both of which are in freefalls. Exports are falling as fast as imports. Let's be charitable and only carve off 3.5 million jobs here, leaving 10 million intact.

Retail. Does anyone doubt that fully 1/3 of all retail outlets are now surplus?

We're talking about fulltime positions here; so cutting hours from everyone on the floor may actually save jobs (i.e. hours cut will not show up in the above statistics) but the equivalent fulltime positions (that is, 40 hours of paid work a week) may well have vanished.

Let's guesstimate that 5 million retail positions will no longer be supported by sales/profits.

Professional and Business Services. Legal and accounting services will suffer as businesses fold. Businesses will decide they need fewer contract workers, fewer consultants, fewer financial services and fewer software upgrades. Let's guesstimate that 2.5 million jobs will eventually be lost in this category.

Education and Health Services. These have been the growth industries, along with financial services, during the bogus "prosperity" of the past eight years. Once millions of jobs are shed, then millions of dollars of health insurance are no longer paid by employers, which means healthcare providers will get squeezed along with every other category.

Here is California, college enrollments are being capped as deficits soar; the inevitable next step is to leave jobs unfilled as people retire--one way or another, a reduction in total education employment. Let's guesstimate 1 million of these jobs get cut--perhaps not by layoffs but by retiring workers not being replaced.

Leisure and hospitality. The sad fact is nobody needs to take a cruise or a vacation; both are the acme of discretionary expenditures. I would be shocked if the U.S. economy didn't shed 3.5 million jobs in this category.

Government. Local government (cities, counties, states and agencies) has added 12% more employees in the past eight years of bogus debt-based "prosperity," and the freefall in tax revenues means those 12% of "new" government jobs will vanish--and that's the best-case scenario. Let's guess that a total of 2.5 million jobs will disappear as tax revenues plummet and then keep plummeting.

The total: 21.5 million jobs--10 times the 2008 MSM-approved estimate of 2 million jobs lost. Very few have the stomach to consider the reality that perhaps 20+ million jobs are no longer supportable by private industry revenues and profits and the tax revenues which depend on those profits and jobs. 21.5 million jobs lost works out to about 15.6% unemployment--a full 10% lower than the 25% unemployment rate reached in the Great Depression.

In other words, 21 million jobs lost is actually an optimistic guesstimate compared to what could transpire in the years ahead--a gradual evaporation of 30-35 million jobs. If Federal fiscal stimulus funds a couple million jobs--more likely retaining jobs in heavy construction and manufacturing that would otherwise be lost rather than adding jobs--then the total job loss might not be as severe until the "extra" Federal spending ends.

Just off the top of my head, here are industries which are sure to be hard-hit: media, advertising, cruise ships (many if not most will be mothballed), professional sports (how many people will be able to afford $45 tickets for lousy seats plus $10 for parking and $25 for a few beers and hotdogs?), spas, auto detailing, non-profits, pricey venues like museums which depend on wealthy donors (far fewer of those suddenly)--the list is long indeed.

Even worse, the deeper issue--the End of Work in a resource-profligate and consumer-based economy--isn't even being addressed yet.

Knowledgeable reader Matt S. who first recommended the seminal demographic study The Fourth Turning recently recommended The End of Work by Jeremy Rifkin.

Rifkin's primary point is that the "full employment" of the bubble eras (dot-com asset bubble followed by credit-housing bubble) was a temporary aberration from the underlying trend caused solely by unsustainable credit-based (borrow and spend) consumerism. The longterm trend is this: productivity is raised by the replacement of human labor (jobs) with automation/machines/software.

As productivity rises, the number of jobs decreases.

This reality has long been visible in manufacturing. The reality of competitive global forces lead to factories of robots assembling robot-assembled components with a few hundred humans to maintain the machines. There are already auto factories like this in Japan. The entire world's auto industry will continue shedding workers even if the number of units produced increases.

Rifkin points to the U.S. steel industry as another example. Since 1981, the industry has boosted production by about a third while reducing the number of jobs from 384,000 to 74,000.

Many observers believe the answer is to pay all of us $25/hour for service work so we can all afford the high-priced services provided by each other. In other words, I prepare you a $5 coffee (plus $2 tax) and then spend my earnings on a haircut, downloading a song off iTunes, going to a club and buying a high-priced drink, playing golf, etc. etc.

While this is certainly appealing--a high-wage service economy which is entirely self-supporting-- the nations which most resemble this model (Japan, France, Germany and Scandinavia) all depend on exports and a trade surplus, and all live with structurally high unemployment.

In other words, their prosperity is still based on the old-fashioned model: make and sell more than than you buy/consume from others.

The only nation which has run massive structural trade deficits during "prosperity" is the U.S., and now the painful reality is revealed: that deficit-borrow-spend model has essentially bankrupted the nation.

Here is how the U.S. has gotten away with it: we have arbitraged our currency, in essence creating a "surplus" of chimerical value via the U.S. dollar.

One way to think about this is: we have traded dollars for goods valued at X (in other currencies, in gold, whatever metric you want) and paid for them with currency worth X-$700 billion: the dollar. This is how we have been able to sustain trade deficits which have broken every other profligate nation's economy throughout recorded history.

Since the rest of the world depends entirely on the export/trade surplus model, they really have no choice: either accept the dollar arbitrage (in effect ceding $700 billion in excess value every year to the dollar) or face the end of the export/surplus model.

Since nobody's come up with a sustainable alternative to the export/surplus model, then the entire world accepted the dollar arbitrage: sell to the American consumer, pocket a surplus to support one's economy, and accept the dollar arbitrage.

The U.S. has "exported" two things in exchange for trillions of dollars of oil and other real goods: inflation via a depreciation of its own currency, and "financial instruments" based on the dollar arbitrage. It continues to be a wonderful scam: we print/create with fractional lending as much paper money as we want (X), and everyone continues to accept it as an IOU worth X when in fact it is worth X-Y (with Y being the U.S. trade deficit).

Can this model of global prosperity continue essentially forever? It's hard to see how, but to date it has proven extremely durable because nobody has a Plan B. So it might last for years to come--as long as the dollar arbitrage doesn't become too onerous. At what point does it become too burdensome? Nobody knows.

The Dollar Crisis: Causes, Consequences, Cures argues that this currency arbitrage/structural deficit is indeed unsustainable.

When the scam breaks down, then the export/surplus model will break down, and global unemployment will skyrocket. There is a lot being written now about the "race to the bottom" in currencies, in which every nation/trading bloc is trying to devalue their currency faster than their rivals in order to support their exports. What makes this so laughable is the one currency which is rising is--drum roll, please--the U.S. dollar. Why?

Because every other nation/trading bloc is still pursuing the export/surplus model: sell more than you buy. That requires they not only accept the dollar arbitrage, they must actively support it. Many observers are astounded by the dollar's strength: this profligate nation's currency should be plummeting like a stone, yet instead it rises!

Once you understand the global dollar arbitrage--we buy your goods to support your export/surplus model, and you accept a dollar intrinsically worth less than the the goods sold, and everyone walks away happy--then this seeming impossibility makes sense.

Were the dollar to fall, as many expect, from 80 on the DXY (dollar index) to say 45, then the global export/surplus model of everyone selling their surplus production to the U.S. will no longer work. Since there is no Plan B, then it's in everyone's interest to keep the game going. It's a lot less painful to accept a "hidden" loss via dollar arbitrage than it is to face structural unemployment and civil unrest if the export model breaks down.

We also read how China is going to transition to a domestic economy, but a study of history finds virtually no examples of such a model. Wealth and thus prosperity has always been created by trade, and it precisely the point at which China turned away from global trade in the 16th century that its long decline began.

Rifkin is an optimist, as he sees the possibility of a new model in which "paying work" is replaced by "work" in a high-tech hydrogen-based economy.

While we work toward that goal--or the alternative vision I suggest in Survival+--then we better be ready to fund food stamps and unemployment benefits for 25-30 million people without paying jobs, and find something productive for them to do--for idle hands eventually find employment with the Devil.

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More on Devolution

Readers expanded on the notion of devolution, prompting me to further my own thinking.


The recent entry on devolution ( Devolution: 20 Predictions) sparked substantive reader commentaries. Astute reader Monnie M. noted that the global supply chains on which we depend are very fragile, and thus a "Black Swan event" which triggers a systemic collapse is not just possible but likely.

I agree that any number of breakdowns could trigger a domino effect, or even a positive feedback (runaway self-reinforcing loop) situation in which each breakdown of a subsystem reinforced the breakdown of a related subsystem.

For example, a major disruption in oil supplies triggers sharp increases in food and food shortages, which add to the social disorder triggered by the oil shortage, etc.

On the other hand, as I have noted here before in my Survival+ series, the system also has negative feedback loops which act to restabilize the system. This interplay of reinforcing and counteracting feedbacks is why I see devolution as not just likely but a mechanism which is already in play. To use another analogy, it is akin to "death by a thousand cuts."

Devolution can also be seen as positive in the sense it is an evolution of an unsustainable system. After mulling over readers' feedback, I think what devolution means to me is a slide down the complexity scale: the piecemeal dissolution or erosion of highly complex systems to simpler forms.

The reason this is painful is that all the people who are feeding at the trough of the complex status quo (think of the 16% of the U.S. economy devoted to sick-care, oops, I mean "healthcare") will resist any decline in their share of the national income with every fiber of their beings.

Thus the system becomes ever more brittle and vulnerable as gradual adaptation is rejected in favor of holding the status quo together with duct tape, accounting trickery (see "California legislature borrows $10 billion from next year, claims to have balanced the budget") and more loans. Having rejected adaptation to resolve the overly complex, financially unsustainable status quo, those feeding at the trough guarantee its devolution: each system breaks down in piecemeal fashion, in effect falling down the stairs of complexity in jarring fashion until it reaches a sustainable level.

We cannot predict the exact timing of this descent, but we can safely predict the bottom level of sustainability is far below current levels. Thus auto/truck sales reached 17 million vehicles a year in the U.S. in the bubble boom times. and now they've fallen down the staircase to 9 million. Sustainability might be 6 million units or even less.

Those feeding at the trough of each industry/State fiefdom will find the reduction in complexity and funding painful, but "unsustainable" means just that. Change of some sort cannot be denied, and so the choice is adaptation, devolution or collapse.

On to readers' comments:

freeacre ( Freeacre & Murph)

"Devolution." Awesome post! I loved it! Maybe it will also lead to:

1) People begin to pick up hitch hikers again. Riders chip in for gas.

2) Neighbors begin to babysit one another's kids or barter the service for foodstuffs or help with gardening, etc.

3) Unemployed teachers are hired by neighborhoods to teach their children in exchange for room and board and a small amount of money.

4) Zillions of RV's are aquired cheap and are parked on public and private land with little regulation. Yurts and assorted hand-made homes are built like crazy. People organize local security teams, like the Guardian Angels.

5) Everybody gardens and barters food, goods, services. If they don't have their own place, they use abandoned ones.

6) People start partying and getting to know each other in block parties and pot lucks, entertain each other making own music for free.

7) Powers That Be try to impose more and more regulation, but are overwhelmed with non-compliance. People just walk away from their debt, credit cards, cell phone contracts, don't renew their drivers licenses, change their names to whimsical substitutes and nicknames. It gets harder and harder for government to keep track of people. Kids make an art form out of computer hacking and misdirecting ruling class and authoritarian telecommunications.

8) The gov't. declares a war and nobody shows up...

9) People get together around bon fires and have ceremonies to "set themselves free."

10) Then, re-named and part of a newly formed tribe, they go on walk-abouts to spread the word....

This could get real interesting....

Frank P.

Good article... and it gives rise to a few other thoughts you might want to consider in part II.

* * *

How about a huge increase in swap meets organized by charities et al. out of which will arise tax evading barter systems.

Cash becomes king, as does hard money, in almost all small transactions and services.

Capital where it still exists will go underground along with whole segments of the real economy.

Local organized crime, other than public servants, will expand.

Vigilantism will likely respond (have you checked out gun/ammo sales lately?)

Corruption in local government will soar rather than be mostly conscribed to county/state/fed levels.

Protection services both illicit and legal will likely be a growth industry. (Do you know a good stock in barrier-fencing?) Banks, grocery and drug stores posting armed security guards at the doors (i.e. like most of Latin America)

Guard dogs become much more common with an upswing in breeder activity.

As Jim Rogers put it, 'capital flight controls will be implemented while the establishment universally opens off shore accounts'

Boat sales have plummeted but will increasingly become home to the displaced. also local piracy will increase.

Possibly a negative immigration rate.

Surge in smuggling of all goods especially foodstuffs and fuel.

Both major political parties will likely fail, existing alternate parties will become dominant players.

Inner sectors of larger cities may become 'dead' zones while small town life will be preferred.

Road blocks may become a common event as will restrictions on travel. (via recently enacted administrative law by USDT)

Small proprietorships will increase as box stores and malls close. (many in the underground economy however)

Speed trap towns will increasingly employ police forces to collect fines on the spot in cash or impound vehicles (basically a form of extortion/hostage taking)

Wild game stocks depleted. (White tail deer had to be reintroduced into Mississippi after the Great Depression)

* * *

Several years ago we traveled to central Asia. Our hotelier in Bukhara told us that government officials come around once a month to collect tax. Its really a shakedown as they took everything leaving him with $10 per month to live on. In Bishkek its common to see old women on the road side with a bathroom scale to weigh passersby for a fee. They had nothing.

I've lived most of my life 'in the country' and I don't mean the burbs. Spent 18 years in rural Alaska and now live in the vicinity of Mount Rainier. In both cases surrounded by trackless miles of unpopulated forest. Most writers' reference points are urban or burban. When fishing SE AK it would be relatively easy to isolate oneself in the waterways' nooks and crannys and avoid other contact for days, even weeks at a time. Subsistence life is hard but abundant. America is still an undeveloped country by population density per sq-mi. I expect to see a rise in squatters especially along streams and rivers here in the NW.

Monnie M.

Interesting piece.

My prediction: It won't happen like this because we'll have an episode, possibly a "Black Swan" event, that will trigger a sudden, overnight systemic collapse.

Such an event could be an EMP attack, a more conventional terrorist attack, or a mechanical failure(s), causing a massive power outage whcih leads to a cascading systemic collapse.

Imagine what a successful terrorist attack just of the magnitude of 911 would do to us now.

It could be a failed Treasury auction (or several within a couple of weeks) leading to a blatant and drastic purchase of these bonds by the Fed, possibly after a Chinese/Russian/European/Middle Eastern boycott of Treasury purchases, and/or throwing much or all of their T-bond holdings on the market. This would cause a bond market collapse and a run on the dollar.

It could be an announcement from China or Middle East that the dollar is no longer the world's main reserve currency, or that the dollar will no longer be accepted at all as payment for oil and possibly other critical commodities. Again, a run on the dollar, a rush into precious metals, and certainly a major move into a barter/black market economy.

It could take the form of widespread public riots following extreme shortages of food and fuel (exacerbated by price controls in a hyperinflationary environment) leading to a declaration of martial law.

It could be a major natural disaster (hurricane or earthquake) or a pandemic disease and quarantine declaration causing a nationwide panic and a buying/hoarding spree.

It could be an Israeli attack on Iran and Iran's closure of the Straits of Hormuz, followed instantly by a surge in the price of oil and a rush to fill car fuel tanks before supplies were exhausted and/or the price exploded.

It could be a federal announcement that welfare checks are being withheld or delayed as a result of an extreme cash flow shortage, or (more likely) a realization that the buying power of those checks has been drastically lowered by hyperinflation without a COLA applied to those government transfer payments, leading to mass rioting and martial law.

It could be the announcement of a "bank holiday" triggering a massive panic and social upheaval.

All of these are plausible possibilities. I'm sure there are several others that I cannot imagine.

I think that you may underestimate the extreme fragility of our system and the thin veneer of our civilization. Consider the effect of our "just in time" ordering, payment, and delivery systems. Ponder the world's very thin food reserves. Think about the rising violent crime rate, the rapidly increasing number of people implementing survivalist planning, and the increase in nonsensical behavior (such as the seemingly very stable, respectable, and responsible SC governor going unannounced to Argentina to see his paramour).

I'd say the gradual drop down to a less functional level you describe is the LEAST likely scenario.

Dave E. (Dave Eriqat)

Fantastic piece! I agree with everything in it, even though I tried to find fault. I especially agree about the emphasis being placed on maintaining the status quo for the insiders, at the expense of the populace. But will they succeed? As you indicate, tax revenue will likely plummet. Eventually, it may fall below what's needed to maintain the status quo, forcing governments to start disbanding to some extent. I could envision entire departments, such as sanitation, being closed and their duties privatized or terminated altogether.

Here's another "prediction" to add to your collection: More beat up cars. I was out driving around after writing you earlier, marveling at all the shiny new cars on the road. When I was a kid, few people had brand new cars. In fact, such an event was a neighborhood event! And there were lots of beat up old cars around.

Thank you, readers, for these insightful commentaries.


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Good Cop, Bad Cop: Obama, Bush and Iraq

Obama's "good cop" routine has masked the reality that his administration has followed the same policy paths in finance and geopolitics as "bad cop" George W. Bush.


I finally understand the fundamental analogy of American politics, and of course it's drawn from film/television: good cop, bad cop. You know the scenario: Bad Cop enters the room and recalcitrant suspect/perp gazes up in hostile, stony silence.

Bad Cop "softens up" the suspect/perp with a "we're going to kick derriere and take names later" speech and then moves on to hardnosed "persuasion:" It'll be a lot easier on you if you cooperate, tough guy, but if you want to play tough, then fine, play tough; we'll play tougher.

After a round or two of this, Bad Cop appears to lose control and is either restrained from assaulting the suspect/perp or goes ballistic in a spittle-flecked tirade a few inches from the suspect/perp's face which communicates this sobering message: "You think you're crazy? Well, I'm crazier."

Bad Cop then lunges at the suspect/perp, only to be restrained by polite Good Cop, who forcefully pushes Bad Cop out of the room and apologizes to the suspect/perp. Good cop speaks in a reasonable, sonorous tone, the exact opposite of the swaggering, aggressive Bad Cop. Good Cop just wants to reach an understanding with the suspect/perp, and just wants to hear him out.

The suspect/perp is delighted to find a reasonable person in this hellhole cell, and with a few additional reassurances from Good Cop, proceeds to spill his guts.

Later, outside, Good Cop and Bad Cop exchange knowing glances; different techniques, same result.

Exactly what has the Obama administration done that the Bush administration would not have done? Throw even more trillions of dollars at the banking sector? Nope; that is precisely what the Bush administration would have done.

Boost American "boots on the ground" in Afghanistan? Ditto.

Give even more power to a hopelessly opaque, venal, destructive Federal Reserve? Ditto.

Foist off simulacrum reforms of the finance and banking sectors as "real reform"? Ditto.

Maintain the American presence in Iraq, regardless of announced "troop withdrawal deadlines"? Ditto.

Loudly proclaim programs to "save the American homeowner" which end up aiding a mere handful of the millions losing their homes? Ditto.

Announce bailout after bailout, all in the name of "saving jobs" even as it would have been cheaper to simply pay hundreds of thousands of people to stay home or go out and have a good time? How many jobs were saved by giving AIG $150 billion? Some of that money will flow into the gargantuan bonuses of Goldman Sachs employees, but that's also what happened when Bush and Paulson held the reins of power.

The number of jobs created or saved with that $150 billion is miniscule compared to what that money could have funded (say, 100 immense solar-power plants).

Back in April I speculated that perhaps Obama had a secret plan to discredit the investment banker cabal and thus undermine their vast political power and reach:Obama's Secret Plan (April 22, 2009)

Alas, like all hopes for genuine, fundamental reform via the political process, this now seems like a foolish bout of wishful thinking. With the "backstops," guarantees, loans and outright direct investments in the banking sinkhole now totalling $13 trillion (the entire GDP of the nation and 1/3 of its total net worth), there is no way Obama can extricate himself from this deep of a pit except to devalue the dollar, which will have horrific consequences far beyond the banking sinkhole.

Let's consider Iraq--the military/Empire misadventure Obama opposed in the election, an opposition which helped him win the presidency. Yes, a "deadline" of American withdrawal has been announced, but such a timeline was already in the works before Obama was sworn into office. Since U.S. casualties are down in Iraq, the conflict has slipped from the news entirely except for brief coverage of suicide bombs which kill scores of Iraqi civilians (lesser bombs and casualty numbers are simply "noise" that's ignored).

In other words, as far as the general American public is concerned, the war is already over. The only people who still care what goes on in Iraq are the people whose family members are still serving there in the U.S. Armed Forces and various subcontractors with lucrative construction or security contracts.

This seems to suit Obama and the Empire just fine. In fact, it's ideal for both: the American presence slips out to secured bases far from the media limelight and Iraqi civilians, fulfilling the strategic goal of the war from the start: regional dominance.

I addressed this dominance in The Fulcrum of the Mideast?(May 19, 2008):

1. The strategic value of Iraq and Afghanistan is rather obvious. If you want to control or influence the mideast, then by all means take the center, Iraq; and if you want to extend your influence all the way to China, Pakistan, Russia and India, then take Afghanistan, too.

Even as someone who sees the war as a catastrophe I am awed by the sheer ambition of the war's planners and respectful of the strategic implications of how it plays out from here.

A cursory glance at the map offers a staggering array of strategic advantages to controlling or influencing Iraq and Afghanistan. Even to an amateur these pop off the map:

you divide troublemakers Syria and Iran, collaborators despite Syria being Sunni and Iran being Shi'ite.

you sit astride two great rivers in a parched landscape.

you can easily project military power into Turkey, Saudi Arabia, Syria, Iran, Jordan and Kuwait, and threaten Russia's southern flank and Egypt.

your can also fill the airwaves of all these surrounding nations with disruptive ideas/propaganda like freedom of the press, individual liberty, economic opportunity, etc.-- dangerous ideas to the surrounding kleptocracies/oligarchies.

you sandwich Iran between Afghanistan and Iraq.

your land forces are within easy range of air support from the US Navy in the Persian Gulf, Arabian Sea and the Mediterranean Sea, not to mention long-range air power from bases in Europe, Diego Garcia and the U.S. mainland.

Afghanistan is central to "the Stans" and shares a small border with China.

even if you do nothing, you unsettle everyone around you because you hold the strategic aces of location, power projection, etc.

2. We know about the oil, but what else is in play strategically? It's about the oil, of course, but beyond that observation lies a wealth of other factors, such as denying that oil to others who you might want to influence. Just choke off the Straits of Hormuz and a world of leverage suddenly opens up.

Put another way: The U.S. never had to "win" the war to gain strategically; it only had to deprive Iran, Syria and Russia a cost-free sphere of influence/satrapy. It has accomplished that at, in terms of Empire, a rather low "cost." All the power-projection assets were already in place: naval strike forces, bases in Europe and Diego Garcia, etc.

Even more ironically, the oil-thirsty major power with the most to lose from U.S. domination of the region--China--ended up funding the war's financial costs via lending the U.S. $1.5 trillion at stupendously low rates of interest.That, ladies and gentlemen, is Empire writ large.

Knowledgeable correspondent B.C. and I have been discussing Iraq and China in some depth recently. As B.C. noted in a recent email:

China is about 30-50 years late to the auto-oil growth model.

Extrapolating China's ~6-10% trend growth of demand for oil, given the presumed peak production (supply) of 85-87M bbl/day, and assuming an indefinite production plateau (realistic . . .?), China's demand will reach that of the US by '20-'21 (that of the US and Eurozone by '29-'30), andChina will consume the entire world's supply of oil by the mid- to late '30s.

world oil supply

world oil demand

global energy consumption

China's energy consumption

Chinese May oil consumption up 6% year over year

Given the choices of alternatives to cheap oil the world has today, there is simply not enough time between now and the mid- to late '10s to implement viable alternatives to allow current rates of remaining relatively cheap oil consumption and GDP growth for the West and China-Asia to continue, albeit now with the world GDP contracting.

Needless to say, the US and the West cannot allow China's growth and consumption to approach anywhere near what we in the West consume for a host of obvious reasons, thus China faces an imminent day of reckoning at which point its growth trajectory is quite likely to decelerate abruptly and "unexpectedly", and thereafter crash violently.

It is within the context of the emerging global resource constraints and a no-growth trajectory that a breakdown of trade and diplomatic relations and resource wars often occur. Iran, Iraq, Syria-Israel-Palestine, Pakistan, Mexico, Georgia, North Korea, and Afghanistan are all areas of increasing risk of instability or chaos, suggesting that the risk to "globalization", i.e., Anglo-American empire, is rising with each passing day.

US military's oil consumption.

Can the Anglo-American imperial military successfully fight wars on multiple fronts? The Middle East, Central Asia, AND Asia-Pacific? Napoleon and Hitler failed to successfully fight two-front wars. And the Romans eventually succumbed to rising costs and diminishing returns to funding a multi-decade, multi-front defense of empire.

B.C. also made these observations on the U.S. strategic interests in Iraq:

The invasion of Iraq was part of a larger strategy to (1) secure the Mideast oil fields and shipping lanes; (2) encircle and contain Iran; and (3) a forward front against any designs by Russia and China for future moves against Central Asian and Mideast oil supplies.

Recall Hitler's aim in the 1930s to invade, occupy, and colonize Russia, Ukraine, and Belarus as a resource colony of the 1,000-year Reich. Well, Germany accounts for 25% of the Eurozone economy and a disproportionate share of the area's exports.

But the Eurozone is becoming increasingly dependent upon Russia for natural gas supplies, including at least 30% of Russia's exports going to the Eurozone. With Russia's population declining, the country nearing the peak production plateau, and growth likely to be slow or worse, the Eurozone's energy security could someday be at risk.

Thank you, B.C., for these insightful comments and links.

As a result of these energy and geopolitical realities, China has been forced to seek long-term oil contracts with Venezuela (also a major exporter to the U.S., and within the U.S. sphere of military influence established by the Madison Doctrine) and various unstable kleptocracies in Africa--regimes which may prove to be not the most reliable allies or suppliers.

Imagine for a moment if the roles were reversed: The U.S. loans China $1.5 trillion in low-yield loans, money which China used to establish military influence over the heart of the Mideast oil region, forcing the U.S. to seek oil from marginal suppliers a half a world away and from unsavory, profoundly unstable kleptocracies.

No one can say how long any oil-dependent Empire can last, but we can safely assume that the Empire which controls access to most of the world's oil will outlast all others--at least until the oil being exported declines precipitously.


Our previous lists of hot reading and viewing can be found at Books and Films.

Of Two Minds is now available via Kindle: Of Two Minds blog-Kindle

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Thank you, Cudick A. ($50), for your astonishingly generous contributions to this site. I am greatly honored by your support and readership.

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